With historically high fines being levied for failures to retain and supervise electronic communications across some of the largest financial firms, you may be wondering how fine amounts are decided. On an annual basis FINRA’s National Adjudicatory Council (NAC) develops and publishes FINRA Sanction Guidelines to assist FINRA’s adjudicators in imposing a range of sanctions that are consistent and fair in disciplinary proceedings.
- New fine amount range
Starting this year, the fine amount range will be determined by the size of the firm (small-, mid-, and large-sized).
“The improvements to the Sanction Guidelines address the more common violations committed by firms and individuals over the past years and underscore the seriousness of some violations. The NAC carefully considered the changes and agree that the recommendations should be tailored for individuals and different sizes of firms,” said Alan Lawhead, Associate General Counsel to the NAC.
Given the record-breaking fines for communication violations over the last year, we looked into how different the fines will be between the different tiers. While the fines did not change for small firms from 2021 to 2022, there is a large increase in fines for mid- and large-size firms for recordkeeping and supervision violations:
| FINRA Rule | Percent Increase in Fine Amount |
|---|---|
| Rule 17a-3 | 100% |
| Rule 17a-4 | 100% |
| Communications with the Public | 158% |
| Rule 3110 | 159% |
Systematic supervision failures were noted to have no upper limit for midsize to large size firms.
- Other factors affecting fine amount
FINRA has stated that when there are aggravating or significantly aggravating factors, they will consider even higher fines, which is what we’re presently seeing around electronic communications. While the facts and circumstances of each case are different, you can expect an increase in fines if there are:
- Longstanding failures
- Failures to adhere to firm policies
- Off-channel communications on messaging platforms like WhatsApp
FINRA will also consider barring individuals or expelling firms when determining sanctions in each case.
The severity of penalties will also depend on other factors, including:
- Is there a pattern of disciplinary, arbitration or misconduct
- Did the firm accept responsibility for the misconduct prior to detection by the regulator
- Did the firm reasonably attempt or apply corrective measures prior to detection by the regulator
- Were there reasonable supervisory, operational, or technical procedures in place at the time of the violation
- Was there reasonable training and education in place at the time of the violation
- Did the firm retain competent legal advice
- Did the firm attempt to conceal the misconduct or did they attempt to provide substantial assistance to the examinators
- Did the misconduct result directly or indirectly in injury, extent of the injury, and the level of sophistication and age of the injured parties
- Was the firm given prior warnings of misconduct that they did not correct
- Other regulators are making the same changes
It’s not just FINRA. We have repeatedly heard SEC officials talk about the importance of recordkeeping requirements.
“Since the 1930s, such recordkeeping has been vital to preserve market integrity,” said Gary Gensler, SEC Chair. “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications. As part of our examinations and enforcement work, we will continue to ensure compliance with these laws.”
With increased fines and aggressive regulator posture, it’s increasingly important to consider making recordkeeping and supervision efforts a top priority for your firm now.
“Other broker dealers and asset managers who are subject to similar requirements under the federal securities laws would be well-served to self-report and self-remediate any deficiencies,” says Gubir S. Grewal, Director of the SEC’s Division of Enforcement.
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Source: Smarsh
Author: Tiffany Magri – Regulatory Advisor at Smarsh
About the author
As a Regulatory Advisor at Smarsh, Tiffany Magri monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.
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